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New state rule could clarify oil, gas royalties

Energy industry and mineral owner representatives hope a new state rule will help improve transparency and reduce disputes on how oil and gas production is reported for royalty purposes.

The rule, passed Nov. 30 by the Colorado Oil and Gas Conservation Commission, provides a process for people receiving royalties from oil and gas leases to seek clarification from companies about issues surrounding payments.

The agency passed the rule as mandated by a law passed by the state Legislature in 2007. That law also required uniform metering of oil and gas production so it is measured in a consistent manner. The oil and gas commission implemented that requirement last year.

The new rule, developed after meetings between companies, mineral owners and other entities, allows mineral owners to request information going back one year from a payment or notification of payment. Companies have 60 days to respond.

Mineral owners want to be able to ask companies to explain how they reconcile the difference between the amount of oil and gas that is produced at a well and the sales amount that is used to determine royalties under many oil and gas leases, said Mary Ellen Denomy, president of the Rocky Mountain chapter of the National Association of Royalty Owners.

She said the difference might be explained by reasons such as use of some of the fuel to run on-site compressors or other operations, or extraction of liquids from natural gas.

Denomy hopes the new rules will help ensure companies account for any discrepancies and that mineral owners will receive proper compensation under lease terms.

The requirement also aims to enable mineral owners to learn more about what deductions are being applied for things such as gas processing, transportation and taxes.

Several disputes between companies and mineral owners over such deductions have ended up in court in places such as Garfield County. Jep Seman, legal counsel for the Colorado Petroleum Association, said he hopes the new process will help head off such litigation in the future.

“I think our hope and expectation is that this defuses some of the controversy that is out there and some of the confusion that people have around reporting of numbers,” he said.

Denomy said lawmakers’ chief goal in passing the 2007 legislation wasn’t to address royalty disputes, but discrepancies between well production information provided to the oil and gas commission and the amount being reported for state and county tax purposes.

“Having the companies report the right amounts means a lot for all taxpayers in the state, because if they pay their fair share, we don’t have to cover it for them,” she said.